The Indian Rupee (INR) witnessed a volatile trading session on Thursday, March 6, 2025, with initial gains against the US Dollar quickly dissipating due to a series of domestic factors. The local currency opened stronger at ₹86.96 per dollar but ended the day at ₹87.11, down by 5 paise. This movement highlights the complex dynamics that influence currency markets, where global factors initially provided support but were ultimately overshadowed by local market pressures.

Rupee’s Positive Opening: External and Internal Factors

The day began on a positive note for the Indian Rupee, supported by a combination of global and domestic factors. The currency’s initial strength came in response to the US decision to delay implementing higher tariffs on imports from Canada and Mexico. Forex traders noted that this announcement had a positive impact on global risk sentiment, which in turn supported emerging market currencies like the Indian Rupee.

In addition to global cues, the Reserve Bank of India (RBI) played a crucial role in strengthening the Rupee. The central bank’s decision to inject ₹1.9 trillion in liquidity into the banking system through open market purchases of government securities and USD/INR swaps provided an immediate boost. This measure was part of the RBI’s ongoing efforts to ensure long-term liquidity stability in the domestic market. The RBI’s liquidity push came on the heels of a USD 10 billion dollar-rupee swap conducted on February 28th, further reinforcing market stability.

As a result, the Rupee briefly touched ₹86.88 per dollar, maintaining its initial upward momentum. The combination of favorable global cues and RBI intervention provided a temporary boost to the domestic currency, creating an optimistic outlook for the day.

Volatility in Domestic Markets: The Role of FII Outflows

However, the Rupee’s strength was short-lived. Despite the initial positive factors, the currency soon faced selling pressure that erased its earlier gains. A significant contributor to this downturn was the volatility in domestic equity markets. Analysts pointed out that fluctuations in the Indian stock market created uncertainty among investors, impacting sentiment and driving demand for the US Dollar.

Moreover, foreign fund outflows played a key role in weakening the Indian Rupee. On Wednesday, March 5, 2025, foreign institutional investors (FII) sold ₹2,895.04 crore worth of Indian equities. This capital outflow exerted downward pressure on the Rupee, as the demand for the US Dollar increased to facilitate these transactions. As is often the case, such outflows tend to undermine the domestic currency, contributing to its depreciation against the Dollar.

The interplay of these factors resulted in a reversal of the Rupee’s earlier gains, with the currency ending the day weaker at ₹87.11 against the greenback. This demonstrates how local market conditions, particularly in the equity markets, can significantly impact the value of a currency.

Global Economic Indicators: Mixed Signals for the Rupee

While the domestic factors played a prominent role in the Rupee’s depreciation, global economic indicators also painted a mixed picture. The US Dollar index, which measures the strength of the US Dollar against a basket of six major currencies, was marginally higher by 0.05 percent, trading at 104.30. This uptick in the Dollar index suggests that the US Dollar remained resilient on the global stage, adding to the pressure on the Indian Rupee.

In the commodity markets, Brent Crude, the global oil price benchmark, traded 0.58 percent higher but remained relatively low at $69.70 per barrel. While this increase in oil prices might have had a positive impact on the Indian Rupee in the short term, the overall global economic environment presented a challenge for emerging market currencies.

The Indian stock market also reflected the mixed sentiment that was driving the Rupee’s movement. The Bombay Stock Exchange’s Sensex closed at 73,709.70 points, down by 20.53 points, or 0.03 percent, while the Nifty index ended lower by 10.75 points, or 0.05 percent, at 22,326.55 points. These slight declines in the Indian stock market mirrored the weakening of the Rupee, as investor sentiment remained cautious amid broader economic uncertainties.

Positive Domestic Data Amidst Challenges

Despite the negative movements in the currency and equity markets, there were some bright spots in the domestic economy. A monthly survey revealed that India’s services sector activity grew at its fastest pace in eight months in February 2025. The HSBC India Services PMI Business Activity Index rose to 59.0 in February, up from 56.5 in January, indicating strong expansion in the sector.

This growth in the services sector was driven by stronger domestic and overseas demand, resulting in faster output expansion and a significant increase in jobs. The positive performance of the services sector adds an optimistic outlook to India’s economic fundamentals, but it was not enough to offset the pressures faced by the Rupee on March 6th.

The Interplay of Domestic and Global Factors

The day’s events exemplified how currency markets are highly sensitive to both global and domestic factors. While global tailwinds initially provided a supportive environment for the Rupee, the domestic challenges, including equity market volatility and foreign fund outflows, eventually outweighed these positive influences.

The situation underscores the delicate balance that currency markets operate within. External factors, such as global economic developments and commodity prices, can have a significant impact on emerging market currencies like the Indian Rupee. However, local market conditions—such as capital flows, equity market performance, and domestic economic indicators—also play a crucial role in shaping currency valuations.

The Bigger Picture: Long-Term Outlook for the Indian Rupee

Looking ahead, the performance of the Indian Rupee will depend on several key factors. On the global front, the strength of the US Dollar remains a crucial consideration. If the Dollar continues to perform well against other major currencies, it could exert continued pressure on emerging market currencies, including the Indian Rupee.

On the domestic front, foreign fund inflows and equity market stability will be critical in determining the direction of the Rupee. If India can attract more foreign investments and the equity markets stabilize, it could provide the Rupee with the support it needs to strengthen against the Dollar. Furthermore, the Reserve Bank of India’s monetary policy decisions and liquidity interventions will play a significant role in ensuring the stability of the Rupee.

India’s economic fundamentals also present a mixed outlook. While the services sector is showing strong growth, other sectors of the economy, such as manufacturing and agriculture, will need to maintain momentum to support the currency in the long term. Additionally, inflation management and fiscal discipline will be key factors in determining the overall health of the Indian economy, which, in turn, will impact the Rupee’s performance.

A Mixed Day for the Indian Rupee

In conclusion, the Indian Rupee’s performance on March 6, 2025, reflected a mix of positive and negative influences. The initial strength of the Rupee was driven by supportive global cues and RBI’s liquidity push, but these gains were overshadowed by domestic equity market volatility and foreign fund outflows. As the Rupee ended the day lower against the US Dollar, it highlighted the complex dynamics of currency markets, where both global and local factors play a crucial role.

Looking ahead, the performance of the Indian Rupee will depend on a variety of factors, including global economic trends, domestic market conditions, and RBI interventions. As always, currency traders and investors will need to closely monitor these developments to gauge the future direction of the Rupee.